Costs invloved in changing to interest only

Ruth1969

Hi folks,
Here's the background info:
70k left on a repayment mtg with 11 Years pleft to run.

We are wondering whether, in order to ease the monthly burden, if we should swap to interest only? I am 40 & partner is 44.
Current monthly payments are approx £680.

My concerns are:

What will the endowment/savings plan cost?
Mtg is fixed until 2011, would we need to pay a penalty.
My credit rating is not great!, would that effect it?

I'd be grateful for any advice?

dunstonh

What will the endowment/savings plan cost?

You cant get endowments nowadays. You would need a replacement invesmtent vehicle and a stocks and shares ISA would be the one typically used. However, the cost at a suitable target growth rate is likely to be comparable or more expensive than a repayment mortgage. That is why you tend to find that only experienced investors considering investment backed mortgages nowadays. There is no cost saving. Its all down to investment potential.

Mtg is fixed until 2011, would we need to pay a penalty.

not normally. However, if the lender allows it (and most are unlikely to) you would pay around £60-£250 to switch.

My credit rating is not great!, would that effect it?

no.

I'd be grateful for any advice?

its not advice. Just discussion. You wont get advice on regulated areas on the internet. Just opinion and discussion. None of the regulatory protections that come with advice will apply.

Ruth1969

Wow, what a quick response!

Hiya,

You pretty much told me what I was thinking but just wanted a second opinion.

We're not in arrears with our mtg, and never have been, so I think we'd be best to wait till 2011, and see what other types of deals there are then and forget moving to interest only.

Compared to most of friends we ARE very lucky, others have way in excess of £1600000 on mtg, and are paying over 30 years, so in the grand scheme of things, we ain't doing to bad!
Lets just hope the interest rates don't sky rocket by then, cause that would just be our luck!

Thanks and for your prompt and concise reply.

Regards. Ruth

Ruth1969

Sorry meant to add... Point taken re asking for "advice!"

R

opinions4u

Ruth1969 wrote: »

Thanks and for your prompt and concise reply.

<whispers> ... click the "Thanks" button for him .

Welcome to the board Ruth.

You may find the Debt-free Wannabe section of the site gives you some great ideas to increase income and reduce outgoings.

property.advert

Should be no or very little penalty. However, you could just think about switching back to a repayment mortgage say in a couple of years.

Here's some numbers:

Mortgage 70k
Term 11 years
Payment £680
Equates to interest rate of 4.7%

Interest only mortgage on same terms is £274 per month, saving £406 per month.

If you went interest only for a year and then went back to repayment, assuming the same interest rate and same end of term date, then your repayment would go down to £274 for one year and then rise to £732 for the remaining 10 years of the mortgage. Going to interest only for 2 years would mean it rising to £796 for the remaining 9 years of the mortgage.

Remember that the saving is discounted by any fees to switch to and then back from an interest only mortgage.

I cannot see any savings plan coming close to the 4.7% you are getting on your repayment mortgage unless you look to medium and above risk investments over the remaining term of the mortgage. Thus, I think your best bet to clear the mortgage on time would be to rejoin as a repayment mortgage.

However, you have the option of not clearing the mortgage by the end of the term.

Can I speculate that you borrowed 120k over 25 years in 1995 ? If so, then your property should be worth much more than the prospective £70,000 outstanding and you could look to trade down at some point to clear that debt. Just an option.

dunstonh

I cannot see any savings plan coming close to the 4.7% you are getting on your repayment mortgage unless you look to medium and above risk investments over the remaining term of the mortgage. Thus, I think your best bet to clear the mortgage on time would be to rejoin as a repayment mortgage.

You wouldnt use a savings plan. You would use an investment plan. Although it is unlikely to be a good idea either way.